SEC Places Strict Monitoring On Brokers Selling Stocks For Foreign Firms

Yemisi Izuora

The Securities and Exchange Commission is to register and actively monitor brokers selling stocks for foreign companies in furtherance of its mandate of ensuring investor protection and market transparency especially for retail investors.

This was disclosed by Executive Commissioner Operations of the SEC, Mr. Dayo Obisan during an interview with Bloomberg weekend.

Obisan said the SEC intends to license firms offering foreign stocks under a “digital sub-broker” regulation, which should provide a form of clarity to their activities adding that the requirement will ensure regulatory responsibilities in on-boarding clients, custody of assets, and compliance with reporting requirements are met.

 

He said the SEC is mindful that these platforms expose investors to both local and foreign stocks and are mooting registration of these platforms under the Digital Sub-Broker regulations which should provide some form of legitimacy for their activities while also ensuring that regulatory responsibilities in on-boarding clients, custody of assets, and compliance with reporting requirements are met.

 

According to him, “Ultimately, we expect that registration will ensure that only genuine platforms target retail investors. We already have one of the platforms at a very advanced stage in the registration process.

 

“The SEC has rules on foreign investments and cross-border transactions which specify the requirements for foreign investors seeking to invest in Nigeria as well as issuers of securities. Broadly speaking, all capital market instruments are registrable – Equities, Bonds, Units of Investment Funds, Derivatives, etc

 

“The Nigerian Market has been open to listing of securities by Foreign Issuers and there are no restrictions in that regard. As mentioned earlier, Part H of our Rules deals with the regulation of foreign investments and cross-border securities transactions. Most foreign issuers take advantage of the reciprocal agreements which exist between Nigeria and the Country of the Issuer especially where the securities regulator of that country is a member of the International Organisation of Securities Commissions (IOSCO).

 

“This is quite distinct from the activities of the online platforms which are brokering secondary deals in securities which have been issued in another country and essentially performing a function for which they have not been registered or licensed, which is what necessitated the circular by the Commission”.

 

Obisan disclosed that Nigerians, like other citizens across the globe have the liberty to trade across borders but said that what has become a growing trend however is the participation by retail investors in cross-border transactions which had hitherto been undertaken by institutional and high net worth investors.

 

“This sort of savvy investors have the resources and skillset to undertake independent evaluations of potential cross-border investments beyond disclosures made to them. What we can confirm, based on our interactions with some of the online platform operators which are facilitating these trades, is that there has been a sharp increase over the last 18 months in the number of users of these platforms.

He said about 400,000 Nigerians invested in foreign stock through online brokers in the last 18 months adding that “there also appears to be an increasing interest among the younger population and this is of interest to the Commission primarily because it creates an avenue for exploitation if it is not properly monitored and regulated. Especially as this interest is not mirrored on the traditional and core asset class”.

“We are aware that there is a growing number of people utilising these platforms for investing in foreign stocks. The platform operators indicate that there is a mix, which is not static because different factors may affect the final execution of transactions, which in itself may not be a true reflection of the interest of the investor. Hence, we don’t have exact figures right now, but we are aware that there has been a growing number”.

 

On the way forward, The SEC Executive Commissioner said the Commission is speaking to CMOs, has engaged and will keep engaging the platform owners who are trying to deploy tech solutions for capital market activities.

 

“We will also be engaging CMOs which have partnered or are looking to partner with platform owners in performing their registered functions. We understand that these partnerships are being forged in a bid to enhance the performance of functions for which they are already registered, however, the Commission needs to be clear on the roles and responsibilities of each party and also obtain clarity on how they choose to support these investments in foreign stocks bearing in mind the currency exposure, ownership and direct custody of assets, adequacy of information being provided to enable the investor make an informed decision and ability to take benefit of corporate actions such as dividends.

 

“It would aid our understanding of dispute resolution mechanisms, existence of insurance and backup facilities, trade settlement and other measures which are in place or which should be in place for the protection of investors on-boarded through these platforms bearing in mind the exposure and potential effect on the local market and the economy in general.

 

“In terms of resolutions, direct investments in foreign stocks is something to be considered carefully. The IOSCO report on cross-border trading recommends that emerging markets such as ours should consider the peculiarities of our corporate environment, extent of investor education, and protection measures which are available to investors. There is a high risk of fraud which must be minimised by whatever approach we eventually adopt. This informed our decision to preliminarily issue a halt order. The outcome of our inclusive engagements with all stakeholders will inform the ultimate outcome and approach. We don’t expect this engagement and resolution process to take an inordinate amount of time given that engagements have been ongoing” He added.

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